Income taxes

12 Months Ended

Dec. 31, 2019

The provision for income taxes is based upon the income (loss) before income taxes as follows (in thousands):



	Years Ended December 31,
	2019			2018			2017
U.S. operations	$	(21,579	)	$	(43,384	)	$	(52,725	)
Non-U.S. operations	6,136			1,076			301
	$	(15,443	)	$	(42,308	)	$	(52,424	)

The components of the provision for income taxes consisted of the following (in thousands):



	Years Ended December 31,
	2019			2018			2017
Current
Federal	$	(71	)	$	(49	)	$	(144	)
State	(3		)	36			3
Foreign	(1,854		)	(1,634		)	363
	(1,928		)	(1,647		)	222
Deferred
Federal	—			42			4
State	—			—			—
Foreign	295			276			(1,135		)
Total provision	$	(1,633	)	$	(1,329	)	$	(909	)

The tax provision differs from the amount obtained by applying the U.S. federal statutory tax rate as follows (in thousands, except percentages):



	Years Ended December 31,
	2019			2018			2017
Federal statutory rate	21		%	21		%	35		%
Tax at federal statutory rate	$	3,255		$	8,869		$	18,354
State taxes, net of federal benefit	(3		)	36			2
Mandatory repatriation/Section 956	—			—			(5,718		)
Permanent differences	1,514			(371		)	(67		)
Stock-based compensation	(1,014		)	(1,079		)	(314		)
Change in valuation allowance	(5,186		)	(10,094		)	16,273
Research and development	932			914			851
Foreign rate differences	(531		)	(697		)	(2,819		)
Foreign tax credit	(405		)	49			144
Change in prior year deferred balances	—			1,653			(28,262		)
Other	(195		)	(609		)	647
Total provision for income taxes from continuing operations	$	(1,633	)	$	(1,329	)	$	(909	)

Deferred income tax assets and liabilities comprise the following (in thousands):



	December 31,
	2019			2018
Deferred Tax Assets:
Net operating loss carryforwards	$	54,339		$	56,828
Federal and state credits	30,111			28,328
Reserves, accruals and other	14,132			11,265
Fixed assets and intangibles	2,783			2,398
Total deferred tax assets	101,365			98,819
Valuation allowance	(92,149		)	(92,891		)
Total deferred tax assets, net of valuation allowance	9,216			5,928
Less deferred tax liabilities:
Acquired intangibles	(283		)	(313		)
Property, plant and equipment	(4,663		)	(4,754		)
Right-of-Use Lease Assets	(3,124		)	—
Net deferred tax assets	$	1,146		$	861
Reported as:
Long term deferred tax assets, included within other long-term assets	$	1,674		$	861
Long term deferred income tax liabilities, included within noncurrent liabilities	(528		)	—
Net deferred tax assets	$	1,146		$	861

The net valuation allowance increased by $0.7 million in 2019 and increased by $16.8 million in 2018. There was no material change to the valuation allowance in 2019.

The Company did not record a full valuation allowance against its net deferred tax assets in most foreign jurisdictions as it believes these deferred tax assets were realizable on a more likely than not basis as of December 31, 2019. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the reported cumulative net losses to date, the Company continues to maintain a full valuation allowance against its net U.S. deferred tax assets.

The Company adopted ASU 2016-16 on a modified retrospective basis effective January 1, 2018. Upon adoption of this standard on January 1, 2018, the Company recorded $1.8 million to accumulated deficit balance for intra-entity transfer of an asset other than inventory in prior years.

As of December 31, 2019, the Company had federal and state net operating loss, or NOL, carryforwards of approximately $290.4 million and $52.1 million, respectively. Federal NOL carryforwards start to expire in 2022 and a portion of the California NOL carryforwards will begin to expire in 2028. As of December 31, 2019, the Company also had federal and state research and development tax credit carryovers of $10.2 million and $18.8 million, respectively. The federal credits will begin to expire in 2020 and the state credits can be carried forward indefinitely. The Company also had $10.5 million of foreign tax credit carryforwards which will start to expire in 2022 if not utilized. Utilization of NOL carryforwards and carried over tax credits may be subject to substantial annual limitation due to federal and state ownership limitations. The annual limitation may result in the expiration of NOL and tax credit carryforwards before utilization. The deferred tax assets listed above do not include NOL carryforwards that are expected to expire unutilized as a result of existing ownership changes.

The Company maintains its position for undistributed foreign earnings to be indefinite and does not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30. Accordingly, the Company does not anticipate the need to provide for additional taxes for basis differences or withholding taxes on remitted foreign earnings in the immediate future.

At December 31, 2019, the Company’s gross unrecognized tax benefits were approximately $20.7 million, of which $0.1 million would impact the effective tax rate if recognized. The Company does not believe that the amount of unrecognized tax benefits will change significantly in the next twelve months. There were no interest or penalties related to unrecognized tax benefits. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Balance at December 31, 2016	$	23,606
Gross increases for tax positions of current year	1,933
Balance at December 31, 2017	25,539
Gross increases for tax positions of current year	657
Balance at December 31, 2018	26,196
Net changes in tax positions in current year	(5,544		)
Balance at December 31, 2019	$	20,652

The Company’s material tax jurisdictions are the United States federal, California, Japan and China. As a result of NOL carryforwards, substantially all of the Company’s tax years remain open to U.S. federal and state tax examination. Tax years for 2013 and forward remain open for Chinese tax examination.